TLT is an actively traded iShares ETF that invests in US Treasury bonds with long durations, over 20 years. This ETF is popularly used as a proxy to long maturity treasuries, since it is easier to trade TLT than individual treasury bonds.
The iShares bond ETFs probably have a similar composition to many other bond mutual funds. Keep this in mind as I describe the shocking facts about this ETF.
I just discovered that TLT does not actually contain too much in the way of treasury bonds. Could you imagine if investors knew this?
From the semi annual report, starting on page 17 (iShares Lehman 20+ Year Treasury Bond Fund) a.k.a. TLT
Net asset value at time of the statement was $1.6 billion
$662 million, or 42% of fund assets, are MONEY MARKET PAPER - COMMERCIAL PAPER
The fund holds 10 individual US Treasury Bonds – but wait –
8 of these 10 bonds are out on loan, in securities lending (not presently in the fund)
In other words, the fund holds less than 60% actual bonds, over 40% commercial paper collateral
The iShares TLT product has nearly half of its "super safe bonds" actually out on loan to investment banks and has received commercial paper ("cash") as collateral... meaning much of the fund is money market paper.
It's not a treasury bond fund.
The SEC should be all over this … I don't think this product can accurately be called a treasury bond fund.
- Perpetual Bull
UPDATE: (June 2009) After analysing several other bond ETFs and bond mutual funds, I have found that many funds are like this and fail to hold the actual bonds they claim. This is currently allowed by regulators and the “securities lending” of huge portions of the fund is considered normal. I recommend that investors avoid all bond funds and instead hold bonds individually and directly whenever possible.